Understanding the correlation between interest rates and the prices of real estate means that the two are inversely proportional. With interest rates, an increase in the rates negatively impacts the real estate market in that there is a decline in the prices of the real estate. However, they also stated that when interest rates go down, this is usually accompanied by an increase in real estate prices, according to Nick Statman. This is because the cost of borrowing money to finance purchasing a house depends on the percentage rate charged by the bank. This article will show how that relationship is structured and how increasing or decreasing the rates affects the housing market.
How do Interest Rates Influence Affordability?
A home purchase is normally funded by a mortgage loan, a loan that is secured by a home. Mortgage rates are related to other interest rates like the federal funds rate or the key interest rate. As a result, there is a direct relationship between the federal funds rate and the rate for mortgages. This causes issues with debt payment and the repayment period for a home loan since the monthly installment is relatively costly. This reduces the amount of money a prospective homebuyer is able to afford in the eyes of the lender. Hence, according to Nick Statman, a lower borrowing power means lower spending capabilities for those who are in the market for homes. Lack of spending money means that the demand for homes is likely to reduce. When the demand weakens, the sellers cannot sell their products at high prices but instead have to offer their products at relatively cheaper prices in a slow market.
Impact of Rising Rates
In case there are signs of rising mortgage costs, the real estate market will almost certainly experience a slowdown. Existing and potential homeowners are locked out of the market as rates go even higher. The homeowners cut down the prices of their homes due to the effect of lower demand. This also discourages those who would have listed their homes for sale in the market when the rates are low.
Impact of Falling Rates
If, for instance, interest rates are decreasing for several consequent months, the opposite happens, according to Nicholas Statman. Lower cost of borrowing to finance the purchase of homes leads to increased buying and selling of homes. The implication of lower rates is that prospective buyers can be able to borrow higher amounts of capital. That means home shoppers can outbid other prospective buyers more often with that increased purchasing power. As demand increases noticeably, home values, in turn go up as well due to the upward pressure on prices.
Conclusion
As evidenced by the interest rate cycles, there is a clear trend in the fluctuation of real estate prices over time. According to Nick Statman, over time, it may be useful to track these changes in rate so as to trigger some major home purchase and investment activities at the right time. This interest rate impact awareness also assists with effective planning for accomplishing real estate objectives, whether on the demand or supply side. Focusing on the direction of rates ensures any property investor is ready and able to weather or capitalize from home price volatility due to the affordability effects of rate fluctuation.
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